One good trade inside the highly competitive world of proprietary trading

PART I - Inside a Prop Trading FirmCHAPTER 1 - These Guys Are Good WELCOME TO THE WORLD OF PROPRIETARY TRADING A FIRM’S GREATEST ASSET: ITS TRADERS BUILD FROM YOUR POSITIVE BASE CHAPTER

PART I - Inside a Prop Trading Firm

CHAPTER 1 - These Guys Are Good

WELCOME TO THE WORLD OF PROPRIETARY TRADING

A FIRM’S GREATEST ASSET: ITS TRADERS

BUILD FROM YOUR POSITIVE BASE

CHAPTER 2 - One Good Trade

DEFINING A BAD SALE

YOU ARE A TRADER, NOT AN INVESTOR

REPLAYING IMPORTANT TRADES

MONEYMAKER’S ONE GOOD TRADE

CHAPTER 3 - A Good Fit

WHO GETS HIRED?

A RECRUITMENT PROCESS

CAN A FIRM ALWAYS SPOT THE NEXT GREAT TRADER?

THE PROS AND CONS OF RECRUITING EXPERIENCED TRADERS

A GOOD FIT FOR THE TRADER

A GOOD HOME

PART II - Tools of Success

CHAPTER 4 - Pyramid of Success

FIRST, BE UNORIGINAL

SURVIVE THE LEARNING CURVE

FOCUS ON IMPROVING EVERY DAY

ASK THOUGHTFUL QUESTIONS

TALK SHOP

DEVELOP A DAILY WORK PLAN

BOUNCE BACK FROM DEFEAT

ELIMINATE YOUR MISTAKES

RESPECT THE MARKETS

MASTER BASIC TRADING PLAYS

LEARN TO EXECUTE ORDERS QUICKLY

FINE-TUNE YOUR FOCUS

CONTROL YOUR EMOTIONS

THE GOOD NEWS

CHAPTER 5 - Why Traders Fail

THEY DON’T LISTEN TO THE MARKET

THEY DON’T LOVE TRADING

THEY CAN’T HIT STOCKS THAT TRADE AGAINST THEM

Smiley: Smiling Back to Hong Kong

THEY HAVE UNREALISTIC EXPECTATIONS

THEY’D RATHER BE RIGHT THAN MAKE MONEY

DON’T FORGET: YOU’RE A TRADER, NOT AN INVESTOR

CHAPTER 6 - Live to Play Another Day

JTOMA: FROM THE ABYSS TO CNBC

DON’T FOCUS ON MAKING PREDICTIONS

YOU MUST BELIEVE

STOPPING YOURSELF OUT (GETTING FIRED)

STARTING TOO QUICKLY

NOT EVERYONE GETS INTO AUGUSTA

PART III - Getting Technical

CHAPTER 7 - Stocks In Play

WHAT IS A STOCK IN PLAY?

WHAT IS A GOOD INTRADAY STOCK?

WHY TRADE STOCKS IN PLAY?

THE IMPORTANCE OF PICKING THE RIGHT STOCKS

BLACK BOX ALGORITHMS ARE NOTHING TO FEAR

SHORTENING THE LEARNING CURVE

FINDING STOCKS IN PLAY

CHAPTER 8 - Reading the Tape

THE TAPE TALKS TO YOU

I HAVE A DREAM

A RIP SAVED

COMBAT HIGH FREQUENCY TRADING

READING THE TAPE 101

PUTTING MORE TRADING PLAYS IN YOUR QUIVER

WHEN AND WHERE TO “LOAD UP” AND STILL LIMIT YOUR RISK

A LOVE AFFAIR WITH CHARTS

HOW DO I READ THE TAPE?

CHAPTER 9 - Maximizing Your Profits with Scoring

SETTING YOUR MAXIMUM INTRADAY TRADING LOSS

TRADING BASED UPON THE TIME OF DAY

HOW TO END A TRADING SLUMP

THE CHEETAH AND THE TRADER

PART IV - The Trader’s Brain

CHAPTER 10 - Trader Education

USING VIDEO TO REVIEW TRADES

PRACTICING TECHNIQUES FROM TOP TRADING PSYCHOLOGISTS

MENTORING

LEARNING FROM TRADERS ON THE DESK

AND YES, WE DO HAVE DEEPER POCKETS

ENFORCING TRADING RULES

THE BANTER ON THE PROP DESK

COMPILING TRADER STATISTICS

SECRET PROJECT X: FINDING CUTTING-EDGE WAYS TO TRAIN TRADERS BETTERCHAPTER 11 - The Best Teacher

NEVER SATISFIED

HIGHLY MOTIVATED

COMMUNICATE CLEARLY

BUILDS ON A FIRM FOUNDATION

YOU SAY TOMATO, I SAY TOMAHTO

LOOKS INWARD

PRACTICES PATIENCE

GETS TOUGH

SACRIFICES

SET FIRM VALUES

CHAPTER 12 - Adapt to the Markets

THE ASIAN FINANCIAL CRISIS

THE INTERNET BOOM

THE BOUNCES OF 2001

9/11

A BEARISH CYCLE IN THE EARLY 2000S

THE SPREAD OF THE PENNY

THEN CAME HYBRID

THE UPTRENDING MARKET

THE HOUSING CRISIS

THE PRICES OF OIL AND GAS SKYROCKET

THE NEAR COLLAPSE OF THE U.S FINANCIAL INDUSTRYETFS EXPLODE IN POPULARITY

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The Wiley Trading series features books by traders who have survived the market’s ever changingtemperament and have prospered—some by reinventing systems, others by getting back to basics.Whether a novice trader, professional or somewhere in-between, these books will provide the adviceand strategies needed to prosper today and well into the future

For a list of available titles, visit our Web site at www.WileyFinance.com

To my Mom and Dad for their unconditional love.

Copyright © 2010 by Mike Bellafiore All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Bellafiore, Mike.

One good trade : inside the highly competitive world of proprietary trading / Mike Bellafiore.

p cm - (Wiley trading series) Includes bibliographical references and index.

ISBN 978-0-470-52940-9 (cloth); ISBN 9780470648971 (ebk); ISBN 9780470648988 (ebk); ISBN 9780470649008 (ebk)

1 Speculation 2 Derivative securities 3 Investment banking.

4 Competition I Title.

HG6015.B.64-dc22 2010005945

As the U.S financial system neared the verge of collapse in the fall of 2008, a 23-year-old proptrader I know was about to pocket $30,000 for a day’s work Rewind to 1998 when some twenty-something prop traders, discards from the big banks, were putting away more than $10-25,000 a daywithout charts, CNBC in the background, a newsfeed, or even air conditioning So what happenedbetween 1998 and today? The Internet Boom and technical advances caused an explosion inproprietary trading but there was never a book written about it Now there is

During the past four years I have been growing a prop trading firm with my childhood friend, SteveSpencer We started with nothing (not even a phone) and today our firm, SMB Capital, employs more

than 60 traders One Good Trade offers all the important lessons the market has taught me over the

past 12 years in and around prop trading I share these market lessons while introducing a cast ofcharacters, some of whom have succeeded, and too many who have failed

We will start with a look at traders to be emulated like MoneyMaker in Chapter 1, whose previouscareer as a professional golfer left him with a superior ability to focus, which he now uses daily tochop up the market You will go inside this previously closed world of prop trading to learn who getshired (classic Joe Biden story enclosed), how we trade (depends on the market), how we find thestocks we trade (you are only as good as the stocks you trade), our game-changing marketfundamentals (One Good Trade), and our superior trading skills (It’s called trading!) You willgarnish a savoring taste of what is really important to become a successful prop trader

Trading is about skill development and discipline Unfortunately, too many people think trading isjust about making predictions, loading up, and being “the man” by holding stocks (you will meetCrabby, who predicted the whole run in oil and never made a dime as a trader) Being a consistentlyprofitable trader is about doing the thousand little things every day - like proper preparation - thatimpact your P&L

As the partner of a proprietary trading firm, I spend a great deal of my time teaching While I stilltrade actively, I am mostly a trading coach What I teach my students and have learned from mytraders I will share with you Lessons like the importance of adapting which one experienced trader,Point-and-Click, was unable to do; he now sells insurance in New Jersey

The light I shine on the world of prop trading will include my mistakes and those of other proptraders A great trader is an elite performer Elite performers spend every day trying to improve.Every day we trade is an opportunity to learn from the market My mistakes and those of other proptraders are just gifts from the market for us to improve, and they will be shared so you can learn

My firm, SMB Capital, will be used throughout this book as an example of how prop firms operate

SMB and its traders have been featured in the TV documentary Wall Street Warriors , appear

regularly on CNBC, and have four regular spots on StockTwits TV It’s an entertaining place! Many

of the learning experiences and anecdotes in this book come from my tenure as partner

Too many traders do not know the stocks to trade and we will discuss how we find the Stocks In

Play Too many new and developing traders cannot Read the Tape and we will argue how thathinders their results Most importantly, I will walk you through this P&L-changing skill.

After a speaking engagement, I was approached by Dapper Don to explain the value a prop firmcan offer and I spend a chapter answering his question I will debunk the myth that a new tradershould seek out a superstar trader to learn best Many new and developing traders could improvetheir P&L if they just understood how to “Score,” and we will illuminate the importance of losslimits, ending a trading slump, and keeping excellent trading statistics

A spot on a prop desk is a dream job for many people, yet they do not know how to succeed oncethey arrive Bloomberg, CNBC, and Fox offer endless hours of professionals pontificating theiropinions Still, I know of many new and developing traders overwhelmed with information and emptywith ideas to improve We will use an old teaching technique of the head basketball coach at UCLA,John Wooden, to offer valuable suggestions in Chapter 4 (Pyramid of Success)

Along my trading and teaching journey, market fundamentals have been hammered into me by myboss, Mother Market A trader with poor fundamentals is a ticking time bomb That is why each tradefor us is One Good Trade At Duke University, Coach Krzyzewski yells, “Next Play” to his players

At SMB, we think One Good Trade, and then One Good Trade, and then One Good Trade We judgeeach of our trades based upon whether we have followed seven fundamentals that compromise OneGood Trade

I have successfully navigated many different markets these past 12 years of trading I will share myjourney with the trading set-ups that worked best for each distinct trading period Most importantly, Iintroduce the principle that has allowed me to profit in so many different markets: I adapt

Welcome to a trading world where you can make your own trading decisions, each day is new,your upside is unlimited, and you likely sit around some funny people In short, prop trading to me isthe very best job in the world

For the developing traders who are underperforming and for those interested in becoming newtraders in the future, this book was written for you The market has taught me the thousands of littlethings required to become successful Many are undervalued by those who have not reached theirtrading potential Welcome inside the highly competitive world of proprietary trading A funny,exciting, enthralling place only for elite performers who master all the skills demanded by MotherMarket

MIKE BELLAFIORE

June 2010

One Good Trade was a collaboration It could not have been written without extensive contributions

from the extraordinary team at Wiley and SMB Capital

And without all those with whom I have traded, trained, mentored, met, shared emails, conversedvia phone, heard of, and read about To all of you, I offer my deepest gratitude!

Thank you to my ghost writer Chris Gillick for his brilliant writing You are an extremely talentedwriter and good friend

Thank you to my partners GMan, Gilbert Mendez, and Steve Spencer for covering for me all ofthose days I was sequestered writing this book

Thank you to my best friend, Steve, for helping transform my idea to build the best equities trainingdesk on the Street into our firm, SMB Capital What an incredible, exhausting, challenging, andrewarding life experience it has been I wouldn’t have wanted to do this with anyone else

Thank you to the best trading coach I know, Dr Brett Steenbarger, for encouraging me to write this

book and helping me make it happen You gifted me the idea for One Good Trade, which I may have

never contemplated on my own You have inspired me to become a better teacher, mentor, trader,author and person

Thank you to all those who have trained and traded with SMB The best part of SMB will always

be you, our traders

Thank you to Alexander James for your invaluable daily input into this project Everything youtouched always became better

Thank you to Charles Basner who makes everyday easier for me and a little bit more enjoyable Ihope you enjoy my Seinfeld references

Thank you to Roy Davis, the best person I know to run SMB Training When you do great work,you attract remarkable people, which is best demonstrated by your presence at SMB

Thank you to our interns for your help with research:

When you become great traders please remember us.

A special thank you for those who took the time to endorse my book You are all the best at whatyou do! I am tremendously grateful for your kind words:

Howard Lindzon, Tim Bourquin, Dr Brett Steenbarger, Charles Kirk, Jason Gardner, NadavSapeika, Brian Shannon, Corey Rosenbloom, Damien Hoffman

Thank you to Meg Freeborn for your awesome advice on content Thank you to Melissa Lopez forwalking me to the finish line Thank you to Tiffany Charbonier for assisting on this brilliant cover.Thank you to Kevin Commins for finding me, giving me this opportunity, and steering me through thisrewarding experience

To my mom, your words are in every sentence To my dad a huge hug and thanks for showing methe value of hard work though never saying a word on the topic

To my beautiful fiancée, Meghan, the best part of my every day is my time spent with you My best

One Good Trade was committing to you.

To all those who have followed SMB on twitter @smbcapital, through our blog at

www.smbtraining.com, on CNBC, on StockTwits TV, and reached out to me, thank you Theprivilege to meet you and hear your trading war stories is my favorite part of writing

PART I

Inside a Prop Trading Firm

CHAPTER 1

These Guys Are Good

I belong to the most exciting part of Wall Street that no one pays attention to That is, until now.

The kind of trading firm I co-founded, a proprietary trading firm, is not a bailed-out governmentbank, a broker-dealer, or a hedge fund, though it does run on some of the same core principles asthose places

Proprietary trading firms do somewhere between 50 and 70 percent of all the equity volume on theStreet on any given day Yes you read that correctly: 50-70 percent Brokers bank hundreds ofmillions on firms like ours each month in trading commissions This money flows to the coffers ofclearing firms that take no risk but enjoy the rewards of the traders’ hard work The government alsomakes out nicely, raking in hundreds of millions annually in SEC taxes (I’m not complaining, justoffering facts.)

To offer some background, proprietary trading exploded during the Internet Boom When I firstbegan trading in the late 1990s, there were only a few firms hiring recent graduates to trade Thereare no exact numbers on how many proprietary trading firms exist today, but the general consensus ismore than a hundred and less than three hundred Obviously this number is now much more than thehandful that existed when I first began

Unlike most firms on the Street, proprietary firms have no clients We do not sell a product or helpsomeone else sell a product We do not take other people’s money and speculate it on their behalf Aproprietary trader’s after-hours schedule is not booked with dinners at New York City steakhouseslike Sparks, drinks at the trendy Buddakan, or Rangers games (the Knicks are presently unwatchable)

We don’t need to schmooze

We eat what we kill Our profits are generated solely from the bets we make on our traders When

we are wrong, we lose our money When we are right—and let me say that is a lot more fun—wekeep a percentage of our winnings

WELCOME TO THE WORLD OF PROPRIETARY TRADING

Proprietary trading (or “prop trading” for short) is done for the benefit of the company’s partners andemployees only, not for the benefit of any client The firm is the client A prop firm’s traders activelyspeculate on stocks, bonds, options, commodities, derivatives, or other financial instruments with itsown capital as opposed to customers’ money

There is no money made on insider tips at the legitimate prop firms I wouldn’t know an insider

unless he walked onto my trading floor and announced, “Hey I am an insider Get long BNI, Buffett isabout to buy a stake in the company.” My news comes mainly from Internet sites like briefing.com and

Bloomberg.com—sites the whole world can access Some proprietary firms have an interest inobtaining private research from institutional banks like Goldman Sachs and they can pay for access to

it We have access to some of this data but it does not make a difference At my firm, SMB Capital,only the floor manager has a phone (his mom calls a lot) We depend on our trading talent We eatwhat we kill I wouldn’t have it any other way

There are some months when a prop trader works 50 hours a week and takes home no money.Heck, there are some months when a trader works even harder and loses money I spent 2002 unable

to make a dime On the contrary, there have been days that a prop trader is up over $10k by 9:35 AM

He punches a few keys, the stock does what he thinks it will do, and he books these outsized profitsfaster than most drink a cup of coffee In fact, there have been some mornings (Black Friday 1999, forexample, when I sauntered onto my trading floor, turned on my computer screens, and saw that myaccount was up over 50k.) Now that is the way to start your morning! This is not one of those jobswhere there are guaranteed contracts with a biweekly check that has the same numbers sprawledacross the pay stub

Many of the brightest of the bright leave our industry humbled (perhaps bitter?) by their inability tomaster the game The smart ones figure out how to parlay their recent trading education into steadyfinance jobs Juxtapose that with prop traders who make seven figures every year walking around injeans and a t-shirt, sitting right next to overdressed bankers every morning on a downtown subway I

know it sounds unfair But re member in prop trading, we are the client Would you dress up in a suit

to impress yourself?

There is a very real chance that the uber bright-and-talented get sent home packing It does not doanyone any good pretending to be a prop trader This is just a lose/lose situation The would-betrader loses by doing something he wasn’t meant to do, and the firm loses time and capital (thoughother market players may wish for these suckers to stay, like dead money at a poker table) Themarket demands that a trader follows all of her rules, every day, and every moment Many just cannotthrive in this unbending universe

At a proprietary trading firm, the trader makes all of the decisions Unlike most jobs, there is nosupervisor or partner reviewing every decision before it’s made Success, for better or worse, istotally self-dependent You determine whether a stock is more likely to go up or down and how muchcapital to risk If you are correct, then the firm and you make money Whether a trade works out ornot, the results are plastered on a huge scoreboard both on your computer screen and on sharedmonitors, kind of like standings in the sports pages Accountability and performance are brutallytransparent

Prop traders are not trying to beat VWAP (Volume-Weighted Average Price, or average intradayprice of the stock) or fill orders for some client For a proprietary trader, beating VWAP is about asdifficult as it is for LeBron to put up 30 You are not entering orders as dictated by a portfoliomanager, PM, or hedge fund manager This is hands-on-the-wheel trading—you determine the marketsand stocks to trade, the size of the trade, and the entry and exit points Your future depends upon one

thing: your trading ability.

If you’re just starting out in prop trading, know that very soon you will be given a trading account.You’ll probably be asked to complete your firm’s training program first, and set some computer keys

to buy and sell (hot keys), but then you’re off! You won’t run errands like an intern might (in whichcase you are on call at all hours) and you won’t fill orders in the Asian markets at 2 AM A good

training program will provide critical feedback concerning your trading but your judgment combined with your trading skills will determine your future.

At a hedge fund or big bank, most would-be superstars sit on the bench for a few years beforebeing given responsibility with live capital And oftentimes, one cannot get a job at a hedge fundwithout having worked at a big bank first At SMB Capital, traders start with live ammo on Day 26

Unlike in years past, when “trial by fire” was the preferred form of mentorship, today’s betterproprietary trading firms have intensive training programs A firm’s partners invest a tremendousamount of capital, time, and teaching to make sure their trainees succeed If a trader is not successful,the firm has invested a great deal of time, energy, and capital with almost no benefit Thus, nothingless than an outstanding training program is in the proprietary trading firm’s best interest

Here are the best parts: compensation is practically unlimited, there are no office politics, and nosubjective end-of-year performance reviews to determine a promotion or a raise or give constructivefeedback like “you need to start asking for more responsibility.” Traders take stock of theirperformance every single day, calculating profits to the cent in real time, and taking home apercentage of the spoils The only haggling for a “raise” comes in the form of top producersrequesting to take home a higher percentage And at some firms, the partners will invite their bestyoung talent to join them, just like in the old days of the Wall Street investment banking partnerships.Transparency, accountability, and instant feedback where else in the corporate world can you getthat?

OK, here’s another “best part” of prop trading Every day is new Pushing papers around and doingthe “same nonsense different day” is the antithesis of our job As an example, here is how I spentBlack Friday of 2009, the day after Thanksgiving, a day I was supposed to spend relaxing, watching

an action movie, and eating leftovers: I awoke at 5:15 AM in Albany, New York, and prepared totake a borrowed car to the Amtrak station, then to the subway, then to my office (door to door it took

me just under four hours) I was the only one awake on Amtrak from Albany to Penn Station as I waspreparing for the day’s Open, trying to communicate with my partner and co-founder Steve Spencer,rip through charts, and find patterns from overseas trading that might give us an edge

Despite my having given the firm the day off, Steve and I contacted all of our traders on the nightbefore because of the news of Dubai defaulting on billions of its debts (Steve is my business partner,but he’s also my best friend since age six.) We reached some of the traders, but not all We spreadword to the StockTwits community, the largest social media finance network, that this Black Fridaywas not a session to miss SPY was opening down huge We might bounce, we might tank, butwhatever happens could offer great opportunity Opportunity is what sustains intraday traders (thoughone of our traders subsists on Burger King and candy) As I reflected on a Thanksgiving Day-stuffedstomach, I was hard pressed to remember a day that offered more potential intraday tradingopportunity than this Black Friday

As a trader, one never knows when he is going to walk into a market that rains money Black

Friday 2009 could have been that day I would not risk missing it So I woke up early, sacrificed timewith my family and a day of recharging, and started my travails.

I patched into our firm morning meeting, which was broadcast to the StockTwits community, via acrappy $300 netbook from a spotty wireless region But I saw and heard Steve from my reclined seat

on Amtrak offering me a game plan for this Open I could have never done this “in the old days.”What a super job by Steve and all who helped him prepare for his show running down all the keylevels to watch before the Open But then he said something that mattered most of all Steveintroduced the idea of market psychology

The news before the Open was not good Asia had digested the Dubai news and showed signs offood poisoning The Asian markets got hammered and our markets were poised to open supremelyweak But Steve reminded all of us that market psychology mattered most The market had shruggedoff every piece of negative news since SPY traded at 70 just nine months before The pattern to “buythe dips” had rewarded traders all during 2009 Steve counseled that if SPY held above 109.10 thenthis would be a signal that Dubai was just another piece of news the market would likely shrug off Itdid

As I left my office building in downtown Manhattan, I thought “Why did the market have to closeearly on this Black Friday? Can we fast-forward to Monday?” I just wanted to trade I felt like

Randolph and Mortimer Duke in the classic movie Trading Places, yelling in the middle of the

trading floor “Turn those machines back on!” The only difference of course was I had just mademoney, not gotten a margin call for $394 million

Now if prop firms are essentially their own client, where is the competition? Trust me, there’splenty of that The market only has so much volume to go around, and every day is like a boxingmatch, beating all big banks, hedge funds, and automated programs to the punch

So who are these people? Most were former Division I athletes or Ivy League math whizzes Somesit around conference tables sipping bottled water, admiring the cufflinks on their French shirts, andstretching their toes in Gucci loafers while enjoying Central Park views from the window (Not to beoutclassed, as one can see the Statute of Liberty from some of my office’s windows) Many havemore money to play with than we do, and can push us around, not to mention more brain power,experience, and “research” information They work at firms with names one would easily recognize.NBA superstar Kobe Bryant is known to fans simply as “Kobe” while his worthy counterpart LeBronJames is simply “LeBron.” Similarly, fans of Wall Street might recognize my competitors with onename as well

Welcome to my world Welcome inside the highly competitive world of proprietary trading

Unlike a big bank that is funded by large shareholders and cheap overnight lending, or a hedge fundbacked by wealthy investors and institutions, a proprietary trading firm is generally funded withcapital from a few partners like Steve and me In most cases, prop firm capital is deficient to theirbetter-known Wall Street peers Certain firms concentrate on trading options and others, arbitrageplays Some hold for longer time periods Others, like ours, concentrate on trading US equitiesintraday And we seek to do this better than anyone else We employ our proprietary trading strategieswith our money against the rest of the Street

Steve and I teach our traders to locate important intraday levels and trade off of these levels Wemake sure our traders focus on stocks with fresh news (Stocks In Play), and we ask them to maketrading decisions based on technical analysis, reading the tape, and intraday fundamentals If we teachthem poorly, then the downside for us personally is significant It’s our money, and our money only,after all If we choose our traders poorly in the hiring process, then the economic cost is painful Ifour firm runs out of money, then we go out of business And the government will not be there to bail

us out, though I secretly like to think we are “Too Small to Fail.”

The biggest reward of this job is the challenge to become an elite performer I seek every day toimprove, and I’ve been at this awhile I do my best to master the psychology of trading Traders learnmore about themselves in a year of trading than many learn in their entire adult lives The challenge is

so intense it cannot help but force one to find the very best inside of him or her Embracing the life of

an elite performer eventually spills over to every facet of life like friend, brother, and son

Contrary to what you might think, a prop firm should not be a cult of traders who worship at thealtar of its successful firm leader SMB Capital is not the Mike Bellafiore or Steve Spencer cult; asleaders, we don’t purport to be all knowing We do not have all the answers Guess how I know that?

I have learned more collectively from the traders I have worked with and trained than I have evertaught anyone At the time of the publishing of this book, there are over 60 professional traders under

my wing, and I am always looking for our next star Firms exist because of their talented traders.There would be no prop firms, no SMB Capital, certainly not this book, without the traders

Unlike traditional brick and mortar companies, where things like property, plant, and equipment sit

on the balance sheet, the assets of a Wall Street firm walk out the door every night Steve and I oftenjoke that we hope to build a firm where the worst traders are us Now that would be some firm!

Cultivating an environment of learning requires stars other than the partners Having star traderswhom new traders can emulate, with whom they can grab lunch or a drink or ask a question, fosters

an environment of perpetual learning And let’s be clear: From a business perspective, star traderscarry the dozens of mediocre new traders until they are ready to produce

But enough pontificating about corporate culture and human capital philosophy Let’s move on to

my entourage (especially when I am buying lunch) The traders profiled in this chapter are damn goodand getting better You would be hard pressed to find any better in our space Unlike industries whereyoung talent is groomed to look, act, and dress in a monotonous way, prop traders really come in allshapes and sizes That alone has kept things fresh throughout my career

So let’s get to this These are all great guys, and their humorous anecdotes are sprinkled throughoutthe book to give you a courtside seat at our game, to show you what really goes on inside the proptrading arena Here’s their introduction

These guys are good

A FIRM’S GREATEST ASSET: ITS TRADERS

In this chapter, you’ll meet Franchise, MoneyMaker, Dr Momentum, GMan, Z$, The Yipster, andJToma (we’ll stick to nicknames for the book—all great traders should have one), and they trulyrepresent all points on the spectrum They differ physically, ethnically, and possess varying standouttalents Each serves as a lesson on the importance of being competitive, focus, getting better everyday, processing information quickly, achieving consistency in trading, perseverance, or a willingness

to keep learning despite the number of years on a desk They possess the characteristics that themarket has taught me are most important to become a consistently profitable trader

Franchise: Good Traders are Competitive

In the spring of 2007, I walked into the conference room at one of our old offices to interview a youngman from the University of Connecticut, (my alma mater, yes!) with one of those names as ethnic as

my own: let’s call him Franchise Instantly, all these boxes started being checked off in my head: ourSMB recruiting matrix was no threat to Franchise!

Franchise was a former college athlete Check He had traded before Check Check He had that

firm handshake that said I’m all business but still carry myself with humility Check, check, and

check

After a few questions, Franchise oozed elite performer—he understood he would not be good atanything unless he worked hard I kept thinking to myself, “To what exactly do I owe this privilege? Irun a year-old fledgling prop trading firm, and this kid wants to work for me?”

I like to joke with one of our interns, Krysten (soon to be an SMB trader), that as much as I likeFranchise personally, he is not exactly the type of person for whom you root He is not an underdog.(We will meet Dr Momentum later in this chapter.) Dr Momentum you root for Not Franchise

Franchise was that kid whose father had to build an extension on the house just to store all histrophies To other guys, he is the one your ex-girlfriend dumped you for, yet to whom you’d gladlydefer To women, Franchise is someone who broke your young heart, but in a nice way

Did I mention his pedigree? He is 6’4” He is a former Division 1 swimmer who trained to qualifyfor the 2004 Olympics His grandfather is an Emmy-and Grammy-winning composer who wrote amusical that still plays on Broadway He vacations with his family at their compound outside the U.S

He is handsome (I can say that, right?), smart, a natural leader, likable, and talented I’m sorry, butguys like Franchise always get the girl, make tons of money, and succeed at whatever they do Simplyput, if there were a Wall Street trader draft, and SMB had the number one pick, I’d sign him to acontract a month before I was officially “on the clock.”

About 10 minutes into our initial conversation my inner voice shouted, “We need to find a way tomake sure this kid does nothing else but trade with us.” As I will further discuss in Chapter 3,generally, I un-recruit candidates, but Franchise is the one interviewee whom I actually tried to close.Maybe it was the UConn connection But somehow we persuaded him What a find!

There is not a single trader on our desk, including myself, including Steve, including GMan (you’llmeet him, too), who is as competitive as Franchise Not one In fact, there isn’t even a close second

Here’s why.

Franchise had a nice run of $1,500-$2,000 days during a period when most on our desk werestruggling Remember, we employ a conservative trading strategy and he was still just beginning.During this run, he asked to talk with me

Bella: What’s up?

Franchise: I feel like I cannot get over this 1,500-2k hump I just don’t know how to do it.

These words on their face might seem innocuous However, his face showed physical pain Hisbody language communicated disgust in his perceived underperformance His demeanor shouted that

he was ready to do whatever he needed to find the next gear for his trading He was like a dog thathad just broken his leg looking up at you to relieve his pain And he was doing well!

Being the best of the best on the desk was not a concern to Franchise The guys are on desk wererespectfully all unworthy of comparison as far as he was concerned He was competing against themarket His goal was to tame this powerful beast Perhaps it was the nạveté of market youth No onetrader is bigger than the market But this conversation summarized his thirst for excellence

First, I offered him some perspective He was actually doing very well, and I made an argumentthat supported this conclusion But then I recommended Franchise work on three short-term goals toimprove his trading: (1) Enough with the trading “On Tilt”; (2) Improve your position sizing; (3)Refine your trading on the Open We could sit in my office all day talking about these weaknesses, butthat wouldn’t help him improve So now he had his tasks, and it was up to him to improve

Franchise now had work to do There were new goals to focus on There was a path to get better.This new challenge was like the gift of a first bicycle to a young child He couldn’t wait to leave myoffice, rid himself of my now useless banter, and get to work

While most enter trading in Hippocratic Oath mode (For doctors: “First, do no harm,” for traders:

“First, don’t blow up.”), Franchise was wacking through the jungle with a thick enough skin to ignorethe peripheral prickly brush and swinging a machete to take out every life form in his path, looking forthe prize like Indiana Jones Making money was a given Being excellent was inevitable in his mind

He continued working, experimenting, studying, pushing, learning until he recognized his potential.Specifically what did Franchise do? He kept detailed notes in his trading journal on theweaknesses he needed to improve He watched video of his trading on his laptop as he commutedhome He pulled me aside asking thoughtful trading questions, never wasting a second of my time Hethought about his trading after the Close He kept up well with the SMB fundamental of sharing ideaswith the desk Slowly but surely, he was improving

The result? Those middling 1,500-2k days soon became 3-4k days

I am not sure what the future will hold for Franchise Nothing would make me happier than for him

to run his own desk with us But I suspect that one day he will leave to go work at a hedge fund

(perhaps his own) and trade much bigger positions If that is what he wants, I will be the first person

to thank him for working with us And if I’ve made enough for myself by the time he’s ready to dothat, I’ll gladly seed him Julian Robertson-style But I am interested I really cannot wait to watch hisfuture unfold Franchise’s story demonstrates how competitiveness, harnessed correctly, can providethe energy the developing trader needs to improve

TRADERS ASK: “WHY CAN’T I JUST MAKE

MONEY?”

An experienced trader, GM, e-mailed me in the summer of 2008 as the Angels were

pounding the Yankees again GM had some very kind words for my previous blog, which I

appreciated and made the latest Yankees loss more palatable In return, I would like to

spend some time offering some guidance on his recent struggles They should not continue

Sometimes, just like GM, I feel that I just can’t make money And when you are getting

beaten up consistently, it is human nature to viscerally conclude that the market is just too

hard for you But a good trader does not succumb to this very human yet initialoverreaction A good trader assumes the mentality that there is always an escape

There is a wonderful movie, Red Belt, written by one of our great playwrights, David

Mamet The protagonist, Mike Terry, played by Chiwetel Ejiofor, is a mixed-martial arts

instructor, and the film opens with Mike teaching his best student This student is in a

chokehold that he cannot escape And Mike is preaching, “There is always an escape

There is no situation you could not escape from You know the escape.” There is always

an adjustment that I can make to improve my trading results for a stock I watch my tradingvideos to discover what I was doing wrong, my escape Almost always, I lose moneybecause of my own human error I fix my errors and move forward When I do my trading,

results immediately improve

But to improve your results you must review your work and eliminate your mistakes.This experienced trader had conquered the market the past five years What percent oftraders do you think are capable of making that statement? This is undoubtedly enough data

to conclude that GM is a very good trader GM, sit down and identify your mistakes,

eliminate them, and you will go right back to making money You do not slip from trading

successfully for five consecutive years to being unable to trade profitably anymore That

is, unless you get in your own way But your skills are there Now it’s time for you to

compete

I talk about competing a lot to our new traders on our desk You don’t compete by

saying, “I really want to see better results.” You compete by taking the actions necessary tomake your trading more profitable The reason you are losing money is not because you are

a lousy trader That is not supported by the past five years of trading data You are

struggling because you are making human errors Your present data is not relevant because

it is blanketed with uncommon trading errors Eliminate these mistakes and your resultswill mirror your previous years Make a list of the trades that work best for you Visualize

making successful trades Then make One Good Trade and then One Good Trade and then

One Good Trade

All good traders have had thoughts that they’re at the end, they’ll never make moneyagain, or that the market is just too hard I have sent these very e-mails We are not

Buddhist monks, so these counterproductive thoughts occur But the good trader moves

forward The good trader finds an escape The good trader through positive self-talkreminds himself of his past successes and concentrates on the trades that are workingpresently for him The good trader competes

Best of luck with your trading, GM!

Let’s meet another talented star trader with an uber-profitable combination of passion and pure,unadulterated trading talent

MoneyMaker: Stay Focused

“Failing is not an option for me,” said MoneyMaker during his interview with me I didn’t make much

of this during my first meeting with him because, honestly, a lot of candidates say stuff like this intheir first interview But for some reason I remember in great detail MoneyMaker saying this to me.And recently I asked him if he remembered this He didn’t But he explained, “Trading is what I want

to do, Bella So failing is not an option.” Oh

Well MoneyMaker, many of us want to play for the New York Yankees, but that isn’t happening

So what was it about MoneyMaker wanting to succeed that enabled him to actually succeed? Hishunger was genuine Others claim to love trading but are not willing to pay the price Dr BrettSteenbarger wrote on TraderFeed, his psychology trading blog, that many claim to have a passion fortrading but few sustain the energy to achieve their goals And others like MoneyMaker did not havethe advantage of trading talent So what was it with this MoneyMaker?

Ask MoneyMaker what a friend would notice if he visits our trading desk and he answers: “That Ijust sit in front of my computer the whole day I could sit all day on my desk and wait for setups tohappen to me and I don’t get bored.”

During a slow August day in 2009, when many traders had convinced themselves that the marketswere awful, there was MoneyMaker glued to his seat He was having a fantastic month He had put upover $13k the day before There really was not much going on The housing number was about to hit

in a few minutes MoneyMaker was watching all the ticks in FAS and FAZ The number hit, SPYspiked above 102, an important resistance level, and MoneyMaker loaded up FAZ went up a pointand slowed, then another point and slowed, then pulled back until it made another upmove In 15minutes MoneyMaker made $5k, on a day that many were not on their desk, checking out

www.missuniverse.com, or securing tee times Not MoneyMaker He was there to trade He was

ready to pounce And he crushed a simple trading setup.

Like the Franchise, MoneyMaker is a former athlete In fact, he is a former professional golfer.And I often chuckle at something MoneyMaker said about his ability to focus that plays an integralrole in his success as a trader MoneyMaker explained, “I am used to hitting balls in hundred-degreeweather for hours, so sitting in air conditioning in front of my computer for the day is not difficult forme.” Makes sense, I guess

During a one-on-one discussion, I complimented, “I am just amazed at your ability to focus It isjust remarkable.” He looked at me quizzically and clarified, “Bella, it is not remarkable I just lovetrading It is not difficult for me to stare at my screens because I love trading.”

His focus is not natural He has developed this skill as a former professional athlete, hittinghundreds of balls, for hours, in hundred-degree weather and worse humidity A round of golf can lastfive hours and one must focus on each individual shot This fact is not lost on him or me

MoneyMaker made money from Day One (hence the nickname) His first month trading with SMB

he received a bonus check I can count on one hand how many traders out of a hundred do this fromDay One And he has made money in everything, every sector, he traded First it was the oil stocks.Cha ching! Then it was the financials Then came the ETFs Then longer-term trades MoneyMakercould always just play He has a “feel” for stocks He has trading talent

But MoneyMaker keeps working at his game A good day used to be $1k, and then it was $3k, andnow it’s $10k and counting And again, he is positive 80 percent of all trading days A horrible dayfor him might be negative $1k He has had patches where he has struggled He traded poorly in June

2009 but then rebounded later that summer for a huge August, a month when most of the Street is onvacation

MoneyMaker has an uncanny feel for the order flow As much as I would like to take credit for histape reading skills, he just got it much faster than most When talent melds with passion, then you arespecial And MoneyMaker is a special trader

On deck is the most fascinating person ever to walk the halls of SMB Capital He is Dr.Momentum, the one we all root for

Dr Momentum: Be a Sponge

Dr Momentum started as our first intern He took a job as an accountant at a Big Four accounting firmbut then decided, “You know, this is really not for me I would rather come back (to SMB) Thisenvironment is so much more conducive to growth and learning.” Like GMan, the corporate life wasnot for him It was like some guardian trading angel was watching over us blessing us with Dr.Momentum

Dr Momentum is the smartest person I have ever trained Dr Momentum looks and is young, 24.One of his endearing quirks is that he talks incessantly Well, save the one time Franchise warned, “Ifyou do not stop talking, I am going to come over there and break your (expletive deleted) neck.” Fromone of our traders: “(Dr Momentum) talks constantly all day long Seriously, he never stops.” This

would be annoying from anyone else save Dr Momentum Why? Because he is Dr Momentum.

We all know someone like Dr Momentum Brilliant yet modest Absorbs new information twice asfast as you and remembers twice as much And someone we all root for Dr Momentum is a red-headJewish kid from Brooklyn, who stands 5′7′′ (maybe), and yaps all the time with a smile on his face

I received an e-mail from the location scout for Wall Street 2, directed by Oliver Stone They were

looking for a trading floor to shoot some scenes I offered a few trading floors as ideas (such as theone eventually chosen) and moved on with my day But if they were to look for more than a tradingfloor, if they were to scout for traders, Dr Momentum would not be cast In fact, anyone whosuggested Dr Momentum for a casting call would be derided

Why?

Because Dr Momentum is the anti-Franchise Dr Momentum looks like your accountant He’s like

that Paul Pfeiffer kid from The Wonder Years sitcom Dr Momentum sounds like a crazy cousin on

speed Tall, muscular, athletic, he is not He did not graduate from an Ivy League school only becausehis allergies are so bad he sought refuge in Colorado (Remember Paul Pfeiffer’s allergies?) Cooland restrained are not what comes to mind Dr Momentum will land a girl here and there but I assureyou this is all through sheer genius and perhaps some good fortune

Every conversation is a party to Dr Momentum, with him as the host His brain can’t stopprocessing When I teach he absorbs every piece of wisdom (assuming I share wisdom) that I offer.From Dr Momentum, “I only have to hear something once and I get it Same thing in when I wouldread a textbook I would just read, go bust out the chapter, boom, and I would be done I won’thave to take any notes I won’t have to highlight anything I won’t even have to review and then goback I would just run through the chapter, and then it would be done It would be in my brain.” Dr.Momentum is a sponge

Dr Steenbarger, expert in trading psychology and prominent author, in a presentation he gave toKershner Trading Group, commented that a good trader is a combination of conscientiousness andrisk taker You must get your work done so you can identify excellent risk/reward setups but then youmust also be willing to put on risk Dr Momentum is our poster child for this combination

When we interview a candidate I ask whether they enjoy new restaurants and travel Those thattravel and sample new restaurants tend to be willing to take risks Where does Dr Momentum travel,you ask? Dr Momentum spent three weeks in Japan, Hong Kong, and China during his vacation in

2009 Before he started with us, he spent a month in Nicaragua learning Spanish and absorbing theculture From Dr Momentum, “Most of my friends from Brooklyn are either immigrants or they aresons and daughters of immigrants and when I spend time with their families, whatever accent theyhave, I would pick up on their accent, and start speaking their accent When I was in China, I wasspeaking with a kind of Chinese accent for the two weeks I was there I think I just like to pick up onthings and I absorb them, and they become like part of me very quickly.” Dr Momentum is not afraid

to jump into a new stock offering fresh experiences and exceptional opportunity Given his travels,this fits his personality

Dr Momentum is the best young momentum trader on the desk To trade momentum, you must makelightning-quick decisions And he can Back in the fall of 2008, Dr Momentum crushed Goldman

Sachs (GS) short, then flipped and crushed it long, then re-shorted and caught the next downmove, etc.

He is not physically imposing like Franchise, but has the fleetest hands around

He has no fear I know that fall of 2008 offered many excellent trading opportunities But it takesguts to trade GS with size when it is moving 70 points intraday What if you catch the wrong side ofthe trade? That is a quick $5k out of your pocket That will make your red hair stand on end

But he didn’t And he just crushed that fall of 2008 market In fact, he posted the best results ofalmost all on the desk after just his first few months of trading That’s impressive! That’s because ofhis extraordinary information-processing ability He saw the longs and got long He saw the shortsand hit the bids He scratched his poor trades when necessary The young man from Brooklyn, Dr.Momentum, put on a trading master clinic

Intriguingly enough, Dr Momentum’s best day almost never happened He managed to score a datewith a lovely young lady from the Upper West Side of Manhattan and took her out on the town Thatday had been his best, putting up $20k And according to Dr Momentum, the day only got better:

“Bella, it was a great date!” Dr Momentum stumbled in just before our morning meeting looking likesleep had not been on the menu the previous night He was also wearing the very same shirt from the

day before and a huge smirk on his face Look at you, Dr Momentum, getting a little something

something last night But he made it And this was a good thing for his bank account On this day, he

bested his previous best day by over 50 percent

What is most hysterical about Dr Momentum is that during this huge day, he missed the easiestmove in GS because he was taking a self-imposed rest Dr Momentum has some stamina issues By

11 AM, he looks like a fighter who needs oxygen By 4 PM, some CPR might be needed Add in hisnight of unrest and he was trading on fumes GS dropped an important intraday support level of 100and traded straight down to 86ish Our desk’s P&L spiked like the space shuttle taking off at AndrewsAir Force base Where was Dr Momentum? Resting

It was so much fun watching him so happy As a partner, what could be better than a potentialfuture star like Dr Momentum, who says things like, “Positivity is a skill,” and “It always comesback to the fundamentals: patience, discipline, hard work, a detailed plan.” The guy who few wouldenvision as a Wall Street assassin was just that in the fall of 2008

Dr Momentum’s aggressiveness can cause a stumble here and there The young trader who isalways chattering is also tempted to overtrade And restraint is a virtue that he has not yet learned butthe Street generally values

But I have my money on Dr Momentum trading for many years If not, maybe we can cast him in the

next Wall Street 2 as Gekko’s accountant.

Our star of stars is about to enter the room He is one in a million intraday traders And it almostall never happened

GMan: From “I Quit” to Head Trader to Partner

“If you are too comfortable in a trade then you probably do not have enoughsize.”

—GMan, Head Trader, SMB Capital

I still remember the nervousness It was odd Why was this young person sitting across from Steveand me so nervous? Was he hiding something?

He, Gilbert Mendez, was a graduate of Columbia University with an engineering degree Hisgrades were outstanding This young man had developed a black box for foreign exchange And now

he wanted to intraday trade equities Or so he said

We showed him a recent lecture I had written, which impressed him greatly He asked to take ithome We balked We do not allow proprietary materials to leave the office

And we had all these questions

Steve: What did you think?

Bella: Why was he so nervous?

Steve: He was not that nervous.

Bella: What was with all those questions?

Steve: He is an engineer They make decisions after gathering as much information as possible.

Bella: I guess.

Steve: He was the best candidate we have ever interviewed.

Well, this last statement was a bit dramatic We had been in business two months He might havebeen the fifth person we had interviewed for our new desk (desk might be a strong word—“Gang ofFive” might be more accurate since we had only five traders) But Steve is notorious for over-optimism I call it being “Spencermistic.”

“Spencermism” Never Dies

When we brought in a nice non-English-speaking Fordham graduate for an interview, theconversation went like this:

Steve: We are going to make so much money off of him.

Bella: I hope so.

The guy was never positive a day trading live Ever.

When we created some commercial trading products:

Steve: We are going to make so much money off our intraday alerts.

Bella: I hope so.

We made $500 the first year our intraday alerts were offered

When we brought in Most Frustrating Trader, whom you will meet later:

Spencer: He is by far the best candidate in his class.

Bella: I hope so.

He should have been fired before he ever started

So we had this Spencermistic feeling about this nice young man, obviously much brighter than me,with the hair of a TV soap star, who wanted to trade It was GMan GMan, our future head trader andnow partner Give that round to Spencermistic

And at the start GMan struggled He did not make a dime for his first six months In fact, he wasdecidedly negative In exchange for us wiping out his negative balance we commissioned him to buildour first web site He did a great job!

GMan was temperamental He would bang and scream and curse But he was learning how to trade, which is an excellent way to learn how to expertly Read the Tape He traded like me, save with

fade-a tighter time frfade-ame Before Dr Momentum, who fade-absorbed everything I sfade-aid, there wfade-as GMfade-an Like fade-aparrot, he would repeat what I had said a few weeks before about a stock He still does It is a greatcompliment He was learning He was like a young Bella but much smarter (and more hair)

Six months into his stint with the ultra-new SMB Capital, GMan infamously walked into our office

to quit That was not going to happen His argument presented to Steve was like a guard penetratingthe lane against Patrick Ewing during his Georgetown years Rejection “Get that out of here, GMan,”Spencer swatted with sound reasoning as to why he ought to stay and most importantly a few things heneeded to improve: tape reading and controlling his emotions

So back to work GMan went He crunched his trading numbers We moved to a trading platformbetter able to reward GMan for his newfound trading skills He found some luck with the start of thesubprime mess And finally he started to get it And when he “got it,” “it” came fast $1k Then $2k.Then $3k Then more per day

Ask GMan about his first year of trading and he responds, “The numbers don’t really mean anythingfor the first year and it’s hard to put that aside and stay in the game But as you progress, you will start

to find consistency.” Amen

GMan kept at it Longer-term intraday trades needed to be conquered There were newspreadsheets created to track these setups He created the SMB Chop Tracker from scratch where webreak down our trading in a snapshot statistically There was now less gel in his hair and more money

in his bank GMan had arrived

How did the SMB Chop Tracker help? “I just started to eliminate a lot of the scalps that are reallylow-probability plays and I’ve been starting to work more on the high-probability plays and addingincremental size to them.” Also GMan examines the trades from the SMB Chop Tracker when hisP&L spikes and concentrates on how to trade these plays even better At one point, GMan noticed thatwhile he cannot scalp certain stocks like Mastercard, MA, he can position trade them off of keyintraday levels His statistics instructed that he could not trade MA in and out But GMan found a newway to profit off of MA Further, GMan’s stats tell him not only what sectors he is trading poorly butalso the specific setups that are not profitable So now he can trade all sectors; he just makesadjustments precipitated by his trading statistics Now that is a chop!

I really do not remember when we named GMan the head trader He had been with us since MonthTwo And one day we looked up and he really was the best trader on our desk Steve and I hadstarted to handle more firm-related business (recruiting, legal, clearing deals, and so on) and couldnot focus on trading as much So we needed someone to run the desk full time who we knew wouldsteward our capital well and lead the desk Making GMan our head trader was our best personneldecision to date

How good is GMan? GMan has been stopped out once since he began with us He’s the guy whocan beat you in a race giving you a start halfway to the finish line Let me explain

GMan missed one Open and an 8-point upmove in AIG because he was working on an SMBtraining tool He received a text from a trader on the desk at 12:30 PM informing him of the AIGmove So he flipped open his LightSpeed platform, and spent the rest of day trying to catch ourintraday leaders By 1 PM, he was up $1k By 2 PM; he was up $1,800 by 3 PM, $2,200 and by 4

PM, $4k He almost did it On most days, he is like an ATM And by the way, AIG moved only threemore points that intraday

GMan enjoys his life as much as any young trader on our desk mixing diligent work with hardplaying If you walk on to our trading floor at 4:01 PM on a Friday, it is quite possible that his SMBcoffee mug will be filled with Johnnie Walker Red It does not go unnoticed on our desk that thetrader most likely to be found cozying up to a young female out on the town in NYC is GMan Theindefatigable GMan has been known to make an occasional journey to Atlantic City on weekday nightand make it back barely for the Open The markets are a master challenge for GMan to conquer withhis staggering mental acuity, and NYC, with all that it has to offer the young person, is his playground.GMan will go on to become one of the best intraday traders on the Street I have it on goodauthority that he is about to be named to a new best traders under 30 list GMan recently purchased apartnership with SMB, rounding out his journey from “I Quit” to Head Trader to Partner The bestthing that ever happened to our firm was the day he walked into our trading firm!

Next, let’s meet the Joe DiMaggio of trading, the most consistent intraday prop trader on the Street,Z$

Z$: Make Discipline a Strength

When Z$ (ZMush, Mush, Mushy, and Z are also acceptable nicknames) talks, it is hard to understandwhat he’s saying It’s not that he’s speaking a different language He’s just so soft spoken that one has

to prompt him several times to speak up He mixes a low volume voice with an exceedingly quicktempo, only compounding the problem Imagine a jackhammer without the noise and this is how heshares his words with the world

Speech recognition patterns aside, Z$ is the most consistent trader on our desk Not the mostprofitable, but the most consistent He was positive for two years straight How is that even possible?

In this regard, he is somewhat of an ungodly phenomenon

Z came to us from another firm that had stopped making money when Hybrid arrived at the NYSE,

so he was searching for a new home A friend of SMB’s, Ray Holland, managing member fromAvatar Securities, proposed a sit-down Mushy wasn’t making much money at his other firm (at leastthat’s what I thought he was saying) I found him down to earth and humble, and in the end we werelucky to find him Thanks, Ray!

We have a bias for traders who have traded elsewhere, are struggling, and want to improve Oncethey have bought into our philosophy, they tend to do well with us First, they appreciate the value that

we offer more than the new trader who has no idea how left alone you can be at another firm Second,they have some built-in trading skills that just need to be utilized most effectively Hence, theirlearning curve with us is much shorter

ZMush was no exception We got him in the Stocks In Play We surrounded him with traders whoshared valuable information We stressed the importance of understanding what setups work best forhim through statistical analysis We made sure he was prepared for the day with our SMB AMmeeting Mushy quietly and unassumingly did all the work we asked of him, and he started to makemoney

New traders sometimes believe that the path to becoming a big-time trader is paved by thenecessary losses of significant money If I can lose $30k, then I can learn to make $30k, the thinkinggoes To me, this makes no sense at all While losses might teach you good lessons at the beginning ofyour career, losing too much is irresponsible The truth is that you must first learn to make $100before you can make $200, and build on these positive results

I would label Z the most consistent trader at our firm but that would not be painting the mostprecise picture Z is like the Joe DiMaggio of trading, the legendary Yankee great who holds therecord for consecutive games with at least one hit, and even that lasted only 56 games As I write thisbook, Mush has not had a negative trading day in the last two years That’s 500 or more straighttrading days I guess that is how we derived his nickname Z$ I’m not always sure how these namesget started, but this one is par for the course

Mushy has his setups and he sticks with them He loves to watch a big offer decrement, pay theoffer, and sell the stock when it slows into the upmove Z$ is so proficient at this scalp trade that wehave named it after him, the Mush Trade This setup offers a high-win rate and little risk And he justscans the markets for the setups that work for him

As I’ve learned, the same setups don’t last forever, so GMan pushes Z$ to expand his playbookevery once in a while When GMan finds a Trades2Hold he sends it Mush’s way, and prods him toget into this trade As traders, we should spend each day stepping outside of our comfort zone so weimprove This is what GMan is offering Z$, and Mushy just keeps getting better The other day heheld the volatile AIG for three points A trade he would never have made last year.

After the Close of every trading day, you can find Z$ without fail at his desk watching tape of histrading After the Close, he constantly reviews his trades in his mind Discipline is his strength Hesticks with what works while expanding his playbook with new trades that work for him Just like thesun rises every AM, Z$ is positive The fun is watching him make more and more as he continuallyimproves Give me a desk full of Z$s and I will show you one grateful trading partner and anextremely profitable firm

BUILD FROM YOUR POSITIVE BASE

Those who trade professionally wish to make a lot of money Prop traders are not trying to make

$200 a day They want to make much more They have rarely failed at anything they have done before.Perhaps they have been told their whole life that they were special Most are the smartest person inany room They are uninterested in being ordinary And they aren’t But all of this can be damaging

So these special, ambitious people start to do some thinking On a treacherous, rainy day like the

end of 2008 in NYC they might let their minds wander I am ready to start making some serious

money, they may think I really need to lay into some stocks with more size certainly will be

considered I would look really cool in that new Benz on the back of the News today I am better thanthat Dr Momentum Does he ever stop talking by the way? I want to be the Man!

Just some advice Your risk-adjusted return is more important than your gross P&L You shouldn’ttry to make $5k a day by losing $5k You shouldn’t do this after 10 years and you certainly shouldn’t

do this when you start Often new traders think their ability to lose a lot symbolizes their potential tomake much more No, it doesn’t You should never lose more than half of your median intraday gains

If you are making $1k a day, and a down day previously for you was −500, then now allowingyourself to lose −$5k doesn’t mean you will now be able to make $5k It means now you can lose

$5k Some new traders just don’t understand this

If you want to make $5k a day you must first be able to make $500 consistently (downside of

$250) Then you must show that you can make $750 consistently (downside $375) Then you mustdemonstrate that you can make $1k consistently (downside $500) Then $1,500 (downside $750).Then $2,000 (downside $1k) You get my point But for some very strange reason traders thinkmaking that jump from $1k to $5k requires them to lose $5k in day Again no, it doesn’t

You build from a base You build from your profitable base The way to make more is to makemore while contemporaneously avoiding proportionally greater downside risk And if you can’t makemore than $2k in a day with a downside of $1k, then stay at this level for a while There is nothingwrong with making that kind of money Keep pushing yourself to get better But do not force it

One of the smartest traders on our desk has been making $600 a day And I know he wants to makemore And one day he will But he forced it recently And he didn’t make more than $600 He took ahuge rip He took a rip that will set him back weeks.

I was talking with Steve about this the other day And he became very animated Steve is ultracalm, so it is amusing to watch him get animated But it usually means that he is about to make a verygood point And he did Steve shared that new traders who are making $600 a day can’t take theserips for another very important reason Unlike Steve or myself, they cannot make back $5k They donot have the skills If Steve rips up 5k he can make that back in less than an hour But a new tradercannot If you are making $600 a day, it will take you weeks to make back a huge rip And this game

is about putting money in your pocket, not throwing away a few weeks’ worth of gains

So build from your positive base All of the traders presented in this chapter built from a positivebase to become successful Push yourself to get better But do not force your progression Losingmore means you can lose more It doesn’t mean you can make more

Let’s meet a trader who just crept up on us, became good—damn good, and is still getting better

The Yipster: Improve Every Day

I can’t say I noticed The Yipster’s trading for the first six months he was with us Every once in awhile on the subway ride home Steve would brief me that The Yipster’s numbers were starting to getbetter We preach that you ought to take the beginning slowly, that you ought to get a little bit betterevery day In The Yipster, we have found the poster trader for this mantra

The Yipster wins my award for Most Improved Trader This is the highest compliment I can offer.After all, this is what trading is all about: embracing the philosophy to get better every day Howmany people can accept that they must be self-critical every day and improve? Not many Many justwant to get to a place and rest Not The Yipster Not with his trading

If you ask The Yipster how he improved every day his answer, with a NYC-born twang, is:

“Focusing on being consistent, focusing on fundamentals, focusing on doing the right things Obviously hard work also You know, working, working, working on everything that I couldpossibly do to improve on my game.” You mean you did not have to visit any Mensa meetings? Oh

Ask The Yipster how long will it take to realize his full potential and he answers: “I don’t thinkanybody can truly, truly master the markets I mean, it’s just something that you can get better at, but

I really don’t think it’s something that you can master So, I mean, I’ll be working on it I think myentire career, my entire life.” This is how athletes make their respective Halls of Fame, and TheYipster could be headed in that direction

The Yipster keeps a detailed spreadsheet of all of his work Every single order, every single trade,since Day One, has been recorded The Yipster records his tape and watches his trades every otherday The Yipster says, “I just think there are no short cuts.” He searches for plays that he could tradebetter He looks for ways to add size to his best setups He does all of this to get better every day

Do you have this philosophy as a trader? This is a guy who makes serious money regularly nowalmost every day, with maybe one negative day a month As I said, he was completely off of our radarfor the first six months of his trading But he just kept working, improving, and now he is one of ourbest traders It is not where you start, it is where you are headed that most counts.

At the start of 2010, SMB gravitated toward longer holding periods for our trades, Trades2Hold.Ask The Yipster what he is working on, “I am focusing on my Trades2Hold with bigger size.” Every

so often I notice a big push from him, indicating progress with this goal I can’t say that this progressjumps off the leader board But then again, when he started, he took his time getting better Whywould this be any different?

Let’s introduce our good- looking TV star, the most optimistic and personable trader on our desk

JToma: Practice Positive Perseverance

In the spring of 2009, I got a phone call from a woman named Rachel Pine I had no idea who shewas, but my friend and writing partner Chris Gillick had given her my name Rachel was consulting

for CNBC, trying to staff more traders for the network’s Fast Money program CNBC loved her since she knew our community well from her time as a marketing executive at Trader Monthly magazine.

We are not media shy, and her call made my day

Rachel came to our office to meet us, and liking what she saw, she set up an interview between the

Fast Money producers, and Steve, JToma, and myself CNBC sent a car for us, we hopped in and

started our trek to a place so far out of the way there had to a be a reward upon arrival, the CNBCcampus in Englewood Cliffs across the river I did a double-take as I noticed Steve did not have anysocks on Typical Steve couldn’t care less about this meeting Here we were, having built ourcompany from nothing three years ago to our big meeting with the most-watched business network inthe world This was a big moment, and my partner and best friend didn’t even bother to wear socks!But Steve was just annoyed to be off the desk in the middle of the trading day to visit a bunch of TVpeople Steve doesn’t like, get, or do traditional media (Steve later enthusiastically agreed to do threeStockTwits TV shows a week, and during the trading day the first Web-native financial televisionnetwork) Did I mention he also didn’t shave?

Of course, I was pretty excited Exposure on CNBC would only help in our recruiting efforts toattract young talented traders to our firm And since we are only as good as the players we coach, thiswas one of the most important business meetings in our firm’s young history Did I mention my partnerwasn’t wearing socks?

This was a big deal for us, not because people would watch us per se, but rather there would befootage of us on CNBC Forever We would display it on our web sites and SMB Blog and therewould be no mistaking that this SMB Capital upstart knew intraday trading

JToma was never supposed to go on CNBC Steve really was JToma was a second option I wasoffering Some people like a cheeseburger Steve prefers a veggie burger And JToma and Steve are

as different as a cheeseburger and veggie burger, so CNBC had options

There was an initial meeting with some bright, very young, energetic, fast talking staffers to vet us.

We passed that first test and got sent up to the boss’s office Steve kept growing more annoyed.Another meeting? We need to get back to the office and trade, his body language announced

And so we start our sit-down with the bosses I explain who everyone is and why we are there

The producer of Fast Money starts making this motion with her hands to speed things up I have to

admit I was a little taken aback by this Not to be egotistical, but no one has told me to start talkingfaster in four years I am the co-founder of a successful proprietary trading firm I am the one whocuts people off, ends meetings, and shifts the discussion And often due to my time constraints, I amcurt And here was this producer gesturing at me to talk faster I actually loved it

A powerful TV executive, the Boss (I am not going to use her name because honestly I am a littlescared of her She is really tough, but also someone who has a crystal-clear vision of what herprogramming ought to offer) sat at her desk and scanned the room in our first 15 seconds of thisimportant meeting She asked Steve, “You don’t wear socks?” My worst nightmare was about tocome true Steve blew our chance of being a regular on CNBC because to him this meeting was just anuisance keeping him from his first love, trading

And then one of the bright staffers summarized some of what Fast Money offered on CNBC He

talked much faster than I did, so apparently this was required in front of the Boss Steve wasinaudible but I knew exactly what he was thinking, “That is a great young TV staffer, but how the hellwill that help anyone make money?” And then Steve explained how CNBC should do thingsdifferently He did so in a correcting, almost condescending, fashion Strike two

JToma was our last hope (I was not there to audition) Steve wasn’t wearing socks, and had clearlycommunicated his lack of interest for being involved in anything CNBC As the meeting continued on,

I could see him becoming more uninterested I swear, I thought he was going to ask the Boss to switchseats with him, log on to his LightSpeed account and start trading

JToma offered his background, but more importantly he fought for a chance He wanted to be onthis leading financial news network He was positive, complimentary, and likable with his

presentation When he stopped, the producer of Fast Money smiled and said, “I like him He’s cute.”

And that is how SMB got on CNBC That is how as JToma likes to describe it, he “became theface of SMB (freaking TV stars).” And this is how JToma has been a successful trader throughout hiscareer

JToma is off the charts positive and persistent His wife wouldn’t go out with him when they firstmet so he reoffered a date at Nobu, one of the most delicious and expensive restaurants in the world.She accepted, as this is a dining experience not to be missed no matter who the company

When we first started prop trading, the goal was to trade your own money We made 10-30 percent

of our P&L and needed to bank about $250k to trade our own account This was not even enoughmoney, so we had to borrow another $250k at 12 percent interest to sufficiently fund our account Weessentially had to make millions for our firm before we ever had enough of our own personal money

to trade our own account And when we did, we got to keep 100 percent of our profits after paying

commissions on our trades (which were as much as 600 percent higher than they are today ouch!)

JToma did whatever he had to do He was the annoying guy on the floor who talked to anyoneabout trading at any time, even at the bar and on the weekends, but he was learning JToma would hop

in a car down to the Jersey Shore to talk trading with the best traders at our firm where they relaxed

on the weekend JToma did not have a beach house, or even a summer share He just went down forthe ride hoping to gain nuggets from these successful traders He would come in early, 7 AM, to ripthrough charts with the traders versed in technical analysis He did anything to get better like TheYipster has done a decade later

Not surprisingly, JToma soon made enough to trade his own account Not bad for a guy not yet 23years old But in his first three months, he lost almost all of his money, more than $200k He wasdown to his last $50k The average trader would become depressed I might But JToma shrugged itoff He sought out a prominent performance psychologist and worked to improve some psychologicalhurdles, which were hindering his trading JToma had become afraid to trade, and he needed to gethis fearlessness back The shrink worked More than a decade later, he is still doing what he loves:trading

This sports psychologist offered training techniques to improve his performance, which he stillutilizes today A daily journal was suggested and implemented A plan for every trade was discussedand is now followed Goals were set and surpassed Favorite setups were identified and exploited

Ask JToma what has helped him the most in his professional career and you get this response (bythe way I had to edit his response by a good five minutes JToma admittedly loves to talk.): “It’sabout doing the little things every single day and making yourself better, and that’s my goal My goal

in this part of my life is to get better every day If I do something every day to make myself better, Iknow eventually my P&L is going to show.” Those horrid three months at the beginning of his careerwere an opportunity to learn and get better That $200k in losses was parlayed into many millions at alater date

Before video review there was the JToma Review And he still does this today JToma also owns

a private equity fund, which requires some travel After a flight to Texas, JToma sat in his hotel room,stared at the ceiling and reviewed his trading, tick for tick of his trading day And before video, thiswas an exercise he did habitually after every Close He discovered the trades that worked best forhim, and made more of them He identified what did not work for him and eliminated those trades

Often, behind closed doors, JToma will get frustrated at a trader on our desk that he is mentoring

He will begin, “I just don’t get (so and so) Doesn’t he understand this opportunity?” Or JToma willutter, “I just don’t get these guys Don’t they want to make money?” JToma believes you work as hard

as you have to and do whatever it takes to make it He did

And this whole trading thing almost never happened for JToma He was in DC, waiting to go tolaw school, and working around the clock to pay the bills His girlfriend at the time was upset shecontinually had to wait for him to end one of his late-night jobs Her brother talked him into a tradingjob in NYC so the happy couple would have more time together JToma accepted, put law schoolaside, and moved to NYC

The day JToma arrived was April 1, 2006 Before his start date, JToma broke up with hisgirlfriend He arrived and someone impolitely met him before he could walk on to the trading floor,